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Should be capitalized only noncancellable leases may

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should be capitalized (only noncancellable leases may be capitalized). The Leasing Environment The Leasing Environment The Leasing Environment The Leasing Environment
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Chapter 15-9 If the lessee  capitalizes a lease, the  lessee  records an asset and  a liability generally equal to the present value of the rental payments. Records depreciation on the leased asset. Treats the lease payments as consisting of interest and principal. Accounting by the Lessee Accounting by the Lessee Accounting by the Lessee Accounting by the Lessee
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Chapter 15-10 To record a lease as a  capital lease , the lease must be  noncancelable. One or more of four criteria must be met (see §840-10-25-1): 1. Transfers ownership to the lessee. 2. Contains a bargain purchase option. 3. Lease term is equal to or greater than 75 percent of the estimated  economic life of the leased property. 4. The present value of the minimum lease payments (excluding executory  costs) equals or exceeds 90 percent of the fair value of the leased  property (recoverability of investment test). Accounting by the Lessee Accounting by the Lessee Accounting by the Lessee Accounting by the Lessee
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Chapter 15-11 Recovery of Investment Test (90% Test) Accounting by the Lessee Accounting by the Lessee Accounting by the Lessee Accounting by the Lessee Discount Rate Lessee computes the present value of the minimum lease payments  using its  incremental borrowing rate , with one exception. If the lessee knows the  implicit interest rate computed  by the lessor and it is less than the lessee’s incremental  borrowing rate, then lessee  must use the lessor’s rate.
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Chapter 15-12 Recovery of Investment Test (90% Test) Accounting by the Lessee Accounting by the Lessee Accounting by the Lessee Accounting by the Lessee Minimum lease payments: Minimum rental payment Guaranteed residual value Penalty for failure to renew Bargain purchase option Executory Costs: Insurance Maintenance Taxes Exclude from PV of  Minimum Lease Payment  calculation
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Chapter 15-13 Asset and Liability Recorded  at the lower of: 1. the present value of the minimum lease payments (excluding  executory costs) or 2. the fair-market value of the leased asset. Asset and Liability Accounted for Differently Accounting by the Lessee Accounting by the Lessee Accounting by the Lessee Accounting by the Lessee
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Chapter 15-14 Asset and Liability Accounted for Differently Accounting by the Lessee Accounting by the Lessee Accounting by the Lessee Accounting by the Lessee Depreciation Period If lease transfers ownership, depreciate asset over the  economic life of the asset .
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